Sub-Prime Crisis

Australian government to fund non-bank lenders

Taxpayer funds will be used to buy $8 billion worth of AAA rated Mortgage Backed Securities from non-bank lenders, in an attempt to maintain competition in the home loan market.

Treasurer, Mr Wayne Swan, announced that the Federal Government would move into the home loan market to help non-bank lenders compete with the major banks.

The need to have a competitive home loan market after the end of the sub-prime crisis outweighs the cost of the investment.

Unlike in foreign countries such as the USA, Australian mortgage backed securities have negligible default rates and a high rate of returns, so the taxpayer is expected to make money from this transaction.

The goal of the investment is to restore confidence in the mortgage market and re-invigorate investment in the financial sector.

The $4 billion that the government originally announced was no-where near enough to cover the requirements of non-bank lenders. However, if confidence is restored by the move then non-banks should be able to securitise new loans and fund further lending activities. After feedback from the finance industry the government increased the amount to $8 billion.

Non-bank lenders such as Aussie Home Loans and Resi Mortgage Corporation strongly endorsed the move made by the Treasurer. Lisa Montgomery of Resi Mortgage Corporation noted that the industry eagerly awaits the details of the plan.

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Jones

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